By David Enna, Tipswatch.com
The Treasury’s auction today of a new 10-year Treasury Inflation-Protected Security, CUSIP 91282CRE3, generated a real yield to maturity of 2.438%, the highest at auction for this term since October 2008.
Investor demand appeared to be weak. The bid-to-cover ratio was a lukewarm 2.30 and the “when-issued” prediction used by bond traders was for a real yield of 2.41%. The higher auction result indicates weak demand.
But for investors … this was an excellent auction. Earlier Thursday, a similar TIPS was trading on the secondary market with a real yield of 2.38%. That rose to 2.41% as tensions continued building in the Mideast. The auction result of 2.438% indicates tensions continue, as indicated by sharp declines in both stocks and bonds today.
Definition: The “real yield to maturity” of a TIPS is its yield above future U.S. inflation, over the term of the TIPS. So a real yield of 2.438% means an investment in this TIPS would provide a return that exceeds official U.S. inflation by 2.438% for 10 years.
Global tensions, along with massive debt-issuance needs by the U.S. government and AI-building corporations, have been pushing both nominal and real yields higher in recent weeks. Both the 20-year and 30-year TIPS are inching toward 3% real yields today.
CUSIP 91282CRE3 gets a coupon rate of 2.375%, the highest for this term since a 10-year auction on July 12, 2007, with a coupon rate of 2.625%.
Here is the year-to-date trend in the 10-year real yield. Notice the sharp upward path (and also that data for this chart ended on Tuesday, below today’s auction result):
Pricing
Because the coupon rate (2.375%) was set below the auctioned real yield (2.438%), this TIPS sold at a discounted unadjusted price of 99.444895. In addition, it will carry an inflation index of 1.00325 on the settlement date of July 31. With that information, we can calculate the cost of a $10,000 par value investment at this auction:
- Par value: $10,000.
- Principal purchased on settlement date: $10,000 x 1.00325 = $10,032.50
- Cost of investment: $10,032.50 x 0.99444895 = $9,976.81.
- + Accrued interest of $10.36.
In summary, an investor paid $9,976.81 for $10,032.50 on the settlement date, and from that point forward will earn accruals matching future inflation plus an annual coupon rate of 2.375%. The accrued interest will be returned at the first coupon payment on Jan. 15.
Inflation breakeven rate
At the auction’s close, the nominal 10-year Treasury note was trading with a yield of 4.70%, giving this TIPS an inflation breakeven rate of 2.26%, lower than the most recent auctions of this term. This means the TIPS will out-perform the nominal Treasury if inflation averages more than 2.26% over the next 10 years. Over the last 10 years, ending in June, inflation has averaged 3.3%.
Here is the year-to-date trend in the 10-year inflation breakeven rate, showing a surprising trend lower even amid the pressures of war and oil-supply disruptions:
Thoughts
One factor to remember is that this new TIPS is going to get hit with a principal decline of 0.35% in the month of August, based on the decline in June’s non-seasonally adjusted inflation. We can be sure that was factored into today’s auction. However, that trend could quickly reverse in future months if oil prices keep climbing, an inflationary effect that could spread across the economy.
Overall, I’d say this auction was extremely positive for investors. Yes, real yields could continue climbing higher. But a hold-to-maturity investor is assured of outpacing inflation by 2.438% over the next 10 years. That is very attractive for this term.
This TIPS will have reopening auctions on Sept. 17 and again in November, with the date not yet set. Here are auction results for the 9- to 10-year term over the last four years:
• Now is an ideal time to build a TIPS ladder
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• TIPS investor: Don’t over-think the threat of deflation
• Upcoming schedule of TIPS auctions
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
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David, your photo of social security cola looks really watered down. My father used to do that with ketchup. Are we getting the real cola from our government?
“In the case of a TIPS, the “yield to worst” is the real yield.” (Continuing our discussion, as the replies have maxed out.)
Again, just trying to work through the logic: Let’s imagine a deflationary scenario, where a TIPS with a 1.0% coupon issued at 100 is hit with 10% deflation so the 1.0% coupon is now based on a TIPS price of 90, not 100.
The resulting coupon of $0.90 is below the 1.0% yield on initial par, but still represents a 1.0% return on the current real value of the TIPS, which has dropped from 100 to 90.
So the TIPS at 90 still has the same real dollar value of the original TIPS issued at 100, and the coupon of $0.90 represents the same initial real yield of 1%, so your statement holds. You will still get the same real yield, even though the nominal dollar amounts of the bond value and coupon have fallen.
Whew! That kind of logic makes my eyes cross.
Yes, I think you have it. If a TIPS does mature with inflation-adjusted principal below par value, then the investor gets full par value and so out-performs “inflation” (actually deflation) by a bit. Again, this is highly unlikely and has never happened before. We’ve never had a single year, ending in December, of deflation in the last 55 years (as far as my tracking data go back).
Apologies for posting on a topic unrelated to the TIPS auction, but when I logged into my TD account this announcement under “Info Direct” caught my eye. Last fall there was discussion on this blog of correspondence TD account holders had received encouraging them to empty out the C of I. Well now we seem to have a time frame for it being eliminated. Does that mean additional changes (like the purchase limit) are in the offing? Hmm.
“Starting in mid to late August 2026, Certificates of Indebtedness (CofI) will no longer be a payment option and new security payments will go to your primary bank account. From late August through Fall 2026, remaining CofI will be redeemed to that bank acct.”
TreasuryDirect has been signaling the end of the C of I holding account for months. Here is my Oct 2025 article: https://tipswatch.com/2025/10/26/treasurydirect-sends-another-clear-message-changes-are-coming/ … This does indicate some progress toward moving to a new platform.
Woohoo! I bought some more for my old self and my kids.
I figure this might could indicate that we are in for a rough go in the next few years,
Could it mean that actual deflation might be just around the corner once workers are completely tapped out from inflation running up their personal debt and if the GDP drops? Who knows…
if you think deflation is around the corner, why would you buy TIPS?
I don’t currently see any signs pointing towards deflation and I wouldn’t purchase these bonds if I expected a long deflationary period.
But after thinking about it I believe there is some deflation protection in TIPS. If extended deflation reduced the principal value 50% to $500 on a $1000 bond, I would still be getting about an $11.88 interest payment a year and then would get my full $1000 of capital back upon maturity.
After saying I wasn’t going to buy this offering, I did. Seemed too good to miss. Next buy will be the in 2027 for the 2037 vintage.
I’ll admit I was also tempted. I am trying to keep my sights on the January 2037 maturity coming in six months.
I bought some at surplus to my base plan and of course now wish I’d bought a bit more. It will be interesting to see how the secondary market moves, but mostly I’ll be looking for January now.
What does weak demand at auction imply, if anything, for what the secondary market will be like? I missed the auction and am rather regretting it.
Weak demand today, and tomorrow … who knows? I’d say the market could shift in any direction. Keep an eye on that Jan 2036 TIPS on the secondary market as a possibility.
Thanks, David! I decided to wade in, even though I expect if I’m alive in 10 years I won’t understand how TIPS work. I expect my heirs to sell them all off but in the meantime I can enjoy a decent return. It will be a lot easier for them to unload these than my I-bonds!
A very tempting auction, but I decided to pass. Market technicals are indicating the 10-year real yield may continue to rise over the next six months.
The 5-year real yield is also worth watching. Since May 1 it has averaged ~1.77, a level suggesting the I Bond fixed rate could rise to 1.2% (or possibly higher) in November. If the 5-year real yield stays elevated, maybe we’ll even see a 1.4% or 1.5% fixed rate in 2027.
These are certainly interesting times for the bond market.
10 years still feels too far out for me to tie up money but if there was one to buy it looks like it was this one.
At least until the next 10 year with a higher real yield.
Just so I understand how these two statements work together: “it will carry an inflation index of 1.00325 on the settlement date of July 31.” and “this new TIPS is going to get hit with a principal decline of 0.35% in the month of August.”
TIPS can’t go below par, so only a portion of the 0.35% decline will register, is that right?
No. The principal accrual of a TIPS can go below par value. However, if it is below par value at maturity, the investor will get the full par value. (That has never happened before and is unlikely to happen.) So that August bump lower will need to be made up in future months. It will be a tiny move lower than par, more or less wiping out the 1.00325 index on July 31.
Thanks for the clarification! I learned something new today.
So theoretically the YTW (yield to worst) for TIPS could be below the coupon amount? I understand it’s highly unlikely, but it could happen in theory?
In the case of a TIPS, the “yield to worst” is the real yield. There is no difference. And yes, the real yield can be below the coupon rate — this happens fairly often. If you see a price above 100, that means the real yield has fallen below the coupon rate. This was happening at auctions during the May 2020 to March 2022 period of deeply negative real yields, with the coupon rate set at 0.125%, the lowest the Treasury will go.
Thank you David for your ongoing coverage of the TIPS world. Your post about the likely favorable rate on the 10-year July TIPS motivated me to think about my TIPS purchase strategy. I decided that with such a great rate I could front-load a few years and that maintaining a perfect “ladder” wasn’t that big an issue compared to opportunistically taking advantage of a great rate. I have routinely bought some TIPS at auction that are comparative “stinkers” compared to the rate on this 10-year. With a good front-load hoard under my belt I can be more selective on future auctions. Of course rates could go higher, if they do I’ll likely just buy more.
is there any reason to wait for the reopening, or if it looks attractive? Should one buy it in the secondary market?
It could be a few weeks before you see it available in the secondary market, since the settlement date is July 31. When it is available, and you see a yield you like, sure, buy it. The auction doesn’t offer any crucial advantages, except maybe allowing smaller purchase amounts and no bid-ask spread.
You could also buy the January ’36 notes on the market right now; they are very similarly priced if you want to lock in these yields and did not participate in the auction. I considered doing that myself a couple of days ago but decided to wait for the auction and I’m glad I did. Whether you’ll be better off waiting 8 days (with a Fed meeting in there too) for the new notes to start trading, I would not hazard a guess.
I personally (not a popular view) like to focus on the January maturities for my TIPS ladder. When it matures, I can store the cash and figure out how to pay QCDs and RMDs or other cash needs, for a year. The one negative would be if short-term rates are 0.05% in 2036.
Accrued interest $10.36 per $1,000?
That’s correct. I had a typo and it is fixed!